5 Reasons Why Short Sales Are a Bad Deal for the Homeowner

Interestingly, in the past two months, I’ve met several savvy individuals, whom I would describe as investors, asking for help with investigating their loans. In a couple of those cases, a short sale was attempted as a last ditch effort to save the house. The borrower was of course turned down, leaving the borrower to find another way.

After I audited their loan, the paperwork did not show that the bank negotiating the short sale had any authority to approve a short sale.

If you are surprised by that last statement, I’m not sure why. There seems to be a big lie in the media about how the documentary problems in foreclosures are not really that widespread. This is absolutely false. If a borrower has a loan with one of the big banks and goes into foreclosure, there is a very good chance, I would say as high as 98%, that there are timing issues, robo-signers, notary issues and other statutory problems in the documents.

In one of the examples I mentioned above, the bank sent a real estate agent over to the property, who literally threatened a tenant out of the property, resulting in interference in the borrower’s relationship with their tenant.

I think short sales suck for homeowners in almost every instance. Here’s why:

1.           The Homeowner is Desperate

In about 75% of the people who tell me a short sale horror story, it was their last ditch effort to save their credit score and get out from underneath their upside down house.

When I say last ditch, I mean they have tried almost everything else to save the house. They’ve tried to get a loan modification, but the bank said no. They tried to work out a repayment plan, a refinance, and forbearance or just about everything they can think of to keep their house, and they are at the end of their rope.

However, if you think loan mod hell is bad, wait until you experience short sale hell. I see it all the time with the cases I assist on. The homeowner gets denied for a short sale, only to learn that the bank sold the house at auction for the exact price or for even less than was offered as a short sale.

What’s sad is that in most of the instances I’ve seen, the homeowner actually wanted to keep the house, but couldn’t find another way to save it, so they listed it for short sale.

If you knew your foreclosure paperwork had issues, would that change your decision to list a short sale? Maybe, maybe not. It would depend on whether you really wanted to save the house.

2.           Theory: The People Who Get Approved for Short Sale Are High Earners with a History of a High Credit Score

The only two people I know of personally who managed to get a short sale approved were both high earners with decent credit. One was an IT professional and the other is a friend of mine who is a paralegal in a big law firm. Both stayed current on their bills, with the exception of defaulting on their mortgages.

I don’t have any hard evidence to back up this theory, but I think the banks know that someday, these borrowers will be eligible for another loan in the future and the banks want to lend to them because of their history of being able to pay consistently.

I can’t think of any other reason why they would let these borrowers out of the loan so easy. In both of these examples, the homeowner’s short sale was approved in less than six months.

I don’t think this is too farfetched in terms of theories. Awhile ago, there was talk about how the FICO credit scoring model was changed to predict who the strategic defaulters are.

Everyone else I know personally who attempted a short sale has been denied.

3.           Short Sales are Fraught with Liability

I personally think the only parties who are qualified to negotiate or coordinate a short sale is an attorney, and I still have my qualms about lawyers doing this too.

I recently audited a loan where the borrower was denied a loan mod and a short sale. When I looked at the documents, there was no evidence that the bank who purportedly considered the short sale offers was even legally authorized to accept or deny the offer.

I know a couple of lawyers who were in the short sale business, but got out of it because they did not know whether they were dealing with the proper party. What happens if a lawyer advises a borrower on a short sale and it later turns out the party releasing the lien in a short sale didn’t have authority? Look at the Bevilaqua decision in Massachusetts and you’ll see what I mean.

I know what you lawyers are thinking right now, “The paperwork problem is not that big of a deal. They owe someone some money, and we all know Bank X acquired Bank Y, and so they are going to have to get approval from someone.”

OK, I agree that some party is owed some money. But what happens if the borrower is later sued by the real “lender” when the borrower thought it was resolved? Isn’t this a malpractice issue for lawyers?

And if lawyers are open to exposure in terms of giving advice, it seems like common sense that real estate agents shouldn’t be negotiating short sales.

4.           Real Estate Agents and Title Companies’ Interests Are Counter to the Borrower’s Interests

I see real estate agents doing some stupid stuff that could get them and their supervising brokers into trouble. I don’t know how you supervising brokers sleep at night. If I were a broker, I would make damn sure I was totally confident in the people working for me.

In my own situation, a real estate agent marched onto my property, beat on the door for ten or fifteen minutes and claimed I had to call her to make moving arrangements.

When I told her to stay off my property, and demanded evidence, all she could say was that she does what the bank tells her to do. Unbelievable! Never mind the little issue of following the law! The bank’s word is law, right?

Have these people had part of their brain removed? The part that disables their critical thinking ability that should stop them from doing something they know (or should have known) better than to do.

Giving tax advice, legal advice, breaking into houses, or helping others break into houses and scaring tenants out of houses simply because the bank told you to do these things, are all really bad ideas.

On a lesser note, I want to point out that in many instances, the real estate agent’s interests, that is, making sure the sale closes, run counter to many borrowers’ interests. As I mention in Section 1 above, a lot of people want to keep their house but believe that a short sale is the only way out.

I think these actions are all a result of the way real estate agents are compensated. They are incentivized to do everything they can to ensure a sale closes. If they think they aren’t going to get paid, guess what? In all the lawsuits I’ve worked on where the borrower tried to get a short sale, the agent disappeared after the first NO from the bank. They don’t get paid to stick around and keep trying. In my opinion, the way real estate agents are compensated makes them dangerous to the public because they don’t get paid unless the sale closes, which might influence them to do all sorts of things that could get them into trouble. I am sure there are ways to make money in real estate, but it has to be creative because the market has shifted and the money is not where it used to be. There is no more low hanging fruit in real estate.

One last thing I’d like to mention is the subject of combining a loan audit to get leverage in a short sale. I have never seen this work. For whatever reason, the people who negotiate short sales on behalf of the bank totally freak out at the threat of legal action and it shuts the whole negotiation process down completely. So, use that information for whatever it’s worth.

As for title insurers, I’m not convinced they are really offering title insurance. I don’t know how they could be offering real title insurance, given all the problems with the foreclosure paperwork.

5.           There Are Other Options

Simply put, if you want to get out of a real estate mess, you have options. Those options depend on where the property is located.

You have to be proactive and come up with a plan of action. I am working on a cool tool for borrowers that will show you some of the options you have and how they might play out, so stay tuned for that.

Get some solid advice from advisors you trust, like your CPA and especially a lawyer who understands foreclosure defense and liability issues, if you want to keep your house. I’d still get some legal advice if I didn’t want to keep my house, but wanted to CMA in a short sale. Get all the facts, look at how people are incentivized, and get an independent second opinion if you feel uncomfortable.

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